An Old Fashioned Banking Crisis : Credit Growth and Loan Losses in the UK 1997-2012

This paper examines the expansion of credit in the UK over the years 1997-2007 and the subsequent loan losses on UK sterling lending. This was a substantial credit expansions especially in lending secured on property. This led to only relatively modest losses for UK banks on residential mortgage lending in the period 2008-2013. Instead most of the rise in losses on UK bank sterling lending was associated with commercial property lending, a notably parallel with the two previous episodes of large scale UK loan losses in 1973-75 and 1991-1993. We also consider the role of ‘shadow' banking in this boom and bust, drawing a distinction between ‘old' shadow banking, taking funds from the established banking system, from ‘new' shadow banking, using the modern tools of securitisation and credit risk transfer in order to create money-like substitutes for traditional bank deposits and hence disintermediate entirely from the established banks. We find that shadow banking played only a minor role in the UK credit expansion (some ‘old' shadow banking, with real estate investment trusts and other specialised real estate funds investing in commercial property). Securitisation of residential mortgages also helped fund what now appear as unwise extension of credit into other more risky areas of lending, notably commercial property. Otherwise this was a very old-fashioned banking crisis